Long-term stochastic risk models: the sixth generation of modern actuarial models?

Monday 7 June 2021 The Moderator (Mr K. Jennings, F.I.A.): Hello everyone and welcome to our session today, “Long-term stochastic risk models: the sixth generation of modern actuarial models?” My name is Keith Jennings and I am the chair of the Institute and Faculty of Actuaries (IFoA) Risk Management Board. I have the pleasure of chairing our session today. Our format today is a presentation followed by questions. Please submit your questions during the session using the chat functionality and we can cover them following the talk. Our speaker today is Bill Curry. Bill (Curry) is a Senior Risk Management Actuary responsible for capital oversight and resilience testing at LV. He has over twenty years’ corporate and consulting experience helping firms to better understand their risk exposures through changing times. Bill (Curry) is passionate about the development of new modelling solutions and their application to give real business insights. And with that, I will pass over to Bill (Curry) for the session. Mr W. R. Curry, F.I.A.: Thanks very much, Keith (Jennings), and welcome everyone to my presentation today. Initially, I would like to thank those who helped me with this presentation. I have had a lot of support from my colleagues at LV, from those at the IFoA and from the peer reviewers. Without further ado, we will look at what is on the agenda today. We will talk about the history of some of the actuarial models that are being used, some of the market practice under Solvency II, some of the limitations of that practice. We will go on to look at how some stochastic long-term models can improve on those areas and look at some practical examples. The presentation is quite focused on UK life assurance, but, for those of you who might be working in other areas, I think a lot of the ideas and techniques are still quite relevant. I will start off by talking about the history of actuarial models. First of all, I will discuss the kind of models that are based on commutation functions, formula tables and the use of manual calculations. These kinds of models have been around for several hundred years. Before this generation of models, there were perhaps the kind of models where people were just sharing costs for funerals, but it is really the timeline in Figure 1 that we are looking at here. This shows the real first generation of modern, scientific models. The timeline shows several important points. We have the development of the first life table in 1662, and the first policy valuation in 1762. The formation of the Equitable Life gave rise to a lot of modern actuarial theory. The first scientifically produced reserves also came from that time. So, this is the old approach that has been in place for several hundred years. I was working on models taking this kind of approach back in about 2002, and it represents the main approach that has been used since actuarial modelling started. The next generation is about the advent of computer technology into life assurance. Computers started to find their way into life assurance perhaps in the 1980s. Computers are very good at producing lots of calculations, repeating them very quickly and without error. The advantage that